Boeing 7e7

In: Business and Management

Submitted By luqing0323
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Luqing Zhang August 28th 2013 Boeing 7E7 D/E ratio Tax Rate MRP (6.4%-­‐8.4%) 3-­‐month T-­‐bill 30-­‐yr T-­‐bond Weight of defence Weight of commercial 1.a 0.525 0.35 8.40% 0.85% 4.56% 46% 54% Exhibit 10 Exhibit 10 Given Page 8 Page 8 Exhibit 10 Exhibit 10

Using CAPM to determine cost of equity Since Boeing's revenue highly correlates with the market, I choose the MRP to be 8.4%. Re = Rf + equity beta*(market risk premium) Cost of Equity = 27.3414%

1.b

Risk free rate = 4.56% Using the 30-­‐year Treasury Bond rate to be the risk free rate because the 7E7 project span is about 20 to 30 years

1.c

Since the 7E7 project we are evaluating is a commercial project, I will focus the beta on the commercial part, and Boeing Overall Beta Unlevered beta = Levered beta/(1+D/E*(1-­‐t)) Overall levered beta = 1.62 Unlevered beta = 1.2078 Defence Industry Lockheed Martin Northrop Grumman Defence Industry Average = D/E 0.41 0.64 Levered β Unlevered β 0.37 0.292143703 0.3 0.211864407 0.2520

*selected from the 60 trading days NYSE

Boeing Commercial Beta Overall β = Commercial β * Weight of Commercial + Defence β * Weight of Defence Unlevered Commercial β = 2.0220 Levered Commercial β = 2.7121 2 Capital Structure Weighting Exhibit 10 gives the D/E ratio to…...

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